$30K in Student Debt? Don't Stick Your Family With It

By Barbara Marquand

Published December 18, 2013

Insurance.com

Four-year college students are graduating with heavier debts as tuition and fees escalate while family incomes stagnate. The average student debt jumped to nearly $30,000 for the Class of 2012, compared to $26,000 for graduates in 2011, according to an annual report from the Project on Student Debt at The Institute for College Access and Success.

For many graduate students, the news is even worse:

• The average physician who borrowed money to get through school graduated in 2012 with $166,750 of debt, according to the Association of American Medical Colleges.

• The American Bar Association says that private law school students borrow an average of almost $125,000.

• The average debt for 2012 veterinary graduates with student loans was $151,672, according to the American Veterinary Medical Association survey of graduating seniors.

Got huge student loans like these?

Besides landing a good job, you need to plan how to cover the payments in case something happens to you.

"The debt doesn't go away just because you're sick or disabled," says Marvin Feldman, president and CEO of the LIFE Foundation, an insurance industry group.

Large student debt affects the need for two types of insurance -- disability income insurance and life insurance. Disability income insurance pays a portion of your income if you get injured or sick and can't work for an extended period. Life insurance pays a lump sum to a beneficiary if you die.

The need for disability income insurance

You might get some disability coverage as an employee benefit at work. Employer-sponsored group policies typically pay out 40 to 60% of your base income if you become disabled. The coverage varies, but generally it's one-size-fits-all for the group.

You can also buy an individual disability policy on your own. Individual policies can complement coverage you already have through work or provide all the protection you need if you don't have any disability benefits. An individual policy typically covers up to 70% of your income if you become too sick or injured to work.

Unlike employer-sponsored group coverage, an individual policy can be tailored. You can choose from a variety of riders, or policy additions, to fit your needs.

One of the newest features on the market is a disability income insurance rider to cover student loan payments. Introduced by The Guardian Life Insurance Co. of America, the Student Loan Protection Rider is available as optional coverage with the company's ProVider Plus or ProVider Plus Limited disability policies.

The rider costs $5 to $25 a month, depending on an applicant's age, gender and other factors, and covers up to $2,000 a month in student loan payments, says Lawrence Hazzard, The Guardian's vice president of product strategy for disability income insurance. The company introduced the new rider after conducting focus groups with young professionals.

"It became clear that student loans are the most top-of-mind topic for new professionals," Hazzard says. "The folks who make that investment in education are highly leveraged for the first 10 to 15 years after they graduate."

While average debts for new grads are eye-popping enough, some burdens are even greater. Hazzard says he heard of one professional who owed $500,000 in student loans. Although their earning potential is strong in the long term, young professionals are vulnerable in the first decade of their careers, before they've had a chance to build up their savings.

Unlike other kinds of debt, student loans cannot be discharged if you file for bankruptcy. And the government doesn't discharge federal student loans in case of disability unless you become totally and permanently disabled and can't work at all. Most disabilities, such as cancer or back problems, don't fall into that category. And private loans typically don't have any provisions for disability.

The rider is available in 43 states, and The Guardian is working on getting approval in the remaining states.

Why you need life insurance

There are two reasons people need life insurance, Feldman says. "They love somebody or they owe somebody."

Federal student loans are discharged if the borrower dies. But the law doesn't require private lenders to discharge student loans.

If you die still owing money on private student loans, then the burden passes to your estate or the loans' guarantor or co-signer.

An inexpensive term life insurance policy can cover that risk, so your loved ones don't take a financial hit when they're already reeling from grief.

"You're talking about pennies a day to make sure your debt is covered," Feldman says.

The average cost of a 20-year, $250,000 term life policy for a healthy 30-year-old is about $150 a year, according to the LIFE Foundation and LIMRA, a global research and consulting group that tracks the life insurance industry.

Term life covers you for a certain number of years, such as 10, 15, 20 or 30 years. You can buy a policy to cover you until the loans are paid off and name your co-signer as beneficiary. A life insurance calculator is available on the LIFE Foundation's LifeHappens.org website.

Another option is for the co-signer to purchase the policy. A mother who is a cosigner on a son's student loans, for instance, would buy a policy insuring the son's life and name herself as beneficiary.

"It makes perfect sense," Feldman says.

Nobody likes to think about such grim possibilities, but covering the risk now saves greater hardship later.